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Mutual Funds

Dividend in ELSS Funds Have An Advantage

Is it worth putting money into ELSS funds as they announce a dividend?

HDFC Long Term Advantage Fund just announced a “37.5% dividend”.

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The real yield is about 10%. (Rs. 3.75 on something that currently costs Rs. 36.545). Ignore the “37.5%” figure – it’s a remnant of an archaic system that has little or no value for anyone investing today.

We all know that dividends are your own money coming back to you. Technically you shouldn’t be bothered, whether you pay in and take it out as a dividend, or leave it in, it’s of no difference.

But with ELSS funds, there is a difference. The invested money is locked for 3 years, and you get a tax advantage on it. If you were offered a dividend, you could get a tax advantage on the entire amount, while still getting a part of it back as dividend! [The money would otherwise be locked for three years]

Example: You have Rs. 50,000 and you buy the above HDFC fund before Jan 11. You get a tax break on the entire 50,000 – worth Rs. 15,000 to you if you’re in the 30% bracket. And in a few days you’ll get back 10% of your money – or Rs. 5,000, as dividend. Effectively, you’ve saved yourself Rs. 15,000 in tax by investing only Rs. 45,000.

(A few years back, Birla Sun Life did a one-time stunt with it’s tax plan, giving back HALF your money. But they did it in a shady way – pre-announcing the dividend months earlier, which is not allowed by SEBI. Read this article for more details.)

Yields of 10% are not uncommon – and 10% is probably the lower end of the spectrum. Last year, HDFC’s other tax saving fund, HDFC Taxsaver, announced Rs. 5 dividend on an NAV of Rs. 34 – a 15% yield. If you’re looking to save tax but would like to not have to invest ALL the money, buy a tax saving fund that gives you a high yield, just after the dividend is announced.

Also read: Should you invest in tax saving mutual funds? and Mutual Fund Commissions on Tax Saving Schemes.

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